Browsing some macroeconomic textbooks and websites like the BLS, I have not been able to find an agreed upon standard for any sort of job creation multiplier – something as simple as the fractional reserve money multiplier. It seems there is no universal standard, and the method is unique for each situation and industry.
You hear all the time on the news that ___# of jobs were created from the ARRA government stimulus. For example, Obama said in November:
The job multiplier has to be based on the marginal propensity to consume, which measures how much is saved versus how much is spent from the flow of income. However, this ratio would seem irrelevant to people coming up with Obama’s numbers. As a “rule of thumb,” the White House is assuming that a 1% increase in GDP corresponds to 1 million jobs created in the US (or 0.75 of a percent of the workforce) based on some rudimentary econometrics (which are based on historical behaviors, under historically different conditions.)
However, GDP is still a totality of income measurement. It cannot measure domestic employment, because peoples’ incomes are not equal, and their incomes might be spent internationally, and their incomes could be saved instead of spent. And when each industry has a specific multiplier, how can you use GDP percentage changes as an estimate for employment percentage changes, without even looking at the specific industries that grew?
The problem is – how many indirect jobs are created as a result, and how many induced jobs are created as a result of government spending, or how many “nonbasic” jobs are created. Sometimes Obama gives a specific number — 150,000 or 2.5 million or whatever he is saying these days — about the jobs created from the $787 billion ARRA federal stimulus money. Did he come down from Mt. Zion with these numbers?
The 16-page White House document that uses “macroeconomic methodology” (CBS sounded so surprised?) can be found here.
(The White House says they “save” jobs because they created an estimate for how many jobs would be lost without ARRA funding. They have a “baseline” that they compare the ARRA job creation estimates to, and then they just subtract the difference. But again, this is also using the GDP “rule of thumb”.)
“Because even if the arguments are fallacious, they have an enduring appeal.”
– Economist Gregory Christiansen, as reported in a Bloomberg article by Caroline Baum